One head is better than many

A single financial regulator, rather than sectoral ones, is what India needs

The Union cabinet recently approved two bills expanding the powers of relatively small financial sector regulators. The PFRDA bill and the FCRA Amendment bill, if passed by Parliament, would give statutory powers and greater teeth to the pensions regulator and the commodity futures regulator. Though this may appear to be a reformist move in the current context, it could create difficulties for longer term financial sector regulatory reform.

These two bills were first proposed before the government set up a slew of expert groups to examine financial regulation in India. Almost all these committees suggested that all non-banking financial regulation, at least, be brought under a single regulator. They argued from Indian and international experience that it is becoming increasingly difficult to effectively regulate modern financial firms through a sectoral approach.

It seems unlikely that the cabinet is turning down these expert recommendations, including those from a group chaired by its present chief economic advisor, Raghuram Rajan. It is more likely that in its attempt to fast-track reforms, it has approved all the financial sector and economy bills that had been placed in limbo, without re-examining them carefully in this post-global-crisis world.

The expert groups, including the Mistry, Rajan, Aziz and Sinha committees, have examined the role and function of various regulators and suggested that they be modified to remove the various conflicts of interest, regulatory overlaps and gaps that plague the system today. They also raise questions about economies of scale in the regulation of organised financial trading. At present, regulatory functions on organised financial trading are spread across SEBI, RBI and the Forward Markets Commission (FMC). This separation between multiple regulators has forced an inefficient partitioning within private firms too: for example, a brokerage firm operating on the stock market where it faces SEBI regulation is forced to create a separate subsidiary to trade on commodity futures markets with FMC regulation and a separate subsidiary to be a primary dealer, which involves an engagement with the RBI.

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